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Is it a Good Time to do a 1031 Exchange?

As with any investment decision, it's all about timing. Now is a good time to sell, since demand still appears to exceed the existing inventory, here and on the mainland. Prices have held or continued to increase in the last year, depending on the type and location of property you own, and projections for continued market strength in the next 1-2 years.

If you are thinking about whether this is a good time to do a 1031 exchange, here are some considerations:

Do you have a significant amount of equity? If so, you can leverage that equity without paying capital gains tax in an exchange. Now might be a good time to examine your long term goals and whether your current investment will get you to your goals.

Do you want to upgrade or increase your portfolio? If you are not excited about the returns on your current investments or want to move up or exchange one property for multiple properties that better meet your goals, this is a good time to look at potential replacement properties.

Do you want to relocate your investment assets? If your goals or family situation have changed so that it would be preferable to own property in a different market, now could be a good time to execute, lock in your gains, and leverage them in a different location.

Can you take advantage of interest rates that are still historically low and lock in a low rate? Although rates have recently increased, they are still low compared to historic rates, and expectations are that rates will continue to increase over the next year or more.

Can you help your family with real estate? Do you have a student in college who could use a place to live or a family member in Maui or elsewhere who needs to rent a place?

Do you want to create a financial plan to leave a legacy? Would it be advantageous to exchange one or more properties that are currently in your portfolio for properties in locations where your heirs would like to inherit? If you can strategically purchase properties with your heirs in mind, they can inherit with a stepped up basis and avoid the capital gains that you have deferred.

What are the significant timing issues of doing an exchange close to year end? Normally you have 180 days to complete a 1031 exchange. If you sell a replacement property between October 17 and December 31, you have less that 180 days to complete the exchange unless you file for an extension when taxes are due April 15 because there are fewer than 180 days between the sale date and the date that the tax return in due to the IRS.

Please let us know if we can help you or anyone you know with your decision regarding a potential 1031 exchange and the logistics of selling your relinquished property and finding the replacement property within the required timelines to meet IRS requirements. We can assist with transactions anywhere through our network of agents on the mainland.